Disparity between Banks and insurers validate NAICOM’s call for recapitalization

NAICOM
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The incongruence between banks and insurers in terms of assets, profit, and liquidity validates the decision of the National Insurance Commission (NAICOM) to jerk up the capital bases of insurers so that they can compete on global competitive arena.

For instance 16 largest insurance companies that have released 2018 audited financial statement recorded combined net profit of N24.12 billion; this amount is 8 times less than the N193.44 billion of net income Tier 1 lender, Zenith Bank.

Similarly, the total shareholders fund of these insurers in the period under review stood at N206.07 billion, which is lower equity of Zenith Bank’s total equity of N815.71 billion.

The widening gap between these financial institutions shows there are too many weak insurance companies in Nigeria, and a radical reform is needed to transform the industry.
According to NAICOM, there are 51 insurance companies in Nigeria, less than 20 have strong financial strength.

In other climes, insurers are so liquid that they buy banks, build skyscrapers to generate rental income, and deliver higher returns to shareholders.

During the financial crisis of 2008, Life insurers in the United States, weakened by losses on their immense investment portfolios, were manoeuvring to get a slice of government bailout funds by buying up tiny banks.

China announced earlier in the year that insurance companies are allowed to invest in perpetual bonds and Tier 2 capital bonds issued by certain banks as government seeks to bolster banking industry capital.

The reverse is the case in Nigeria where insurance sector is still one of the most underdeveloped compared to peers in most African countries.

Nigeria, with a population of 180 million people, has a penetration rate of 0.3 percent.

That compares with South Africa (14.7 percent), Kenya (2.8 percent), Angola (0.8%) and Egypt (0.6%). Similarly, the sector’s insurance density (a measure of industry gross premium per capita) is still one of the lowest when compared to peers – South Africa ($762.5), Egypt ($22.8), Kenya ($40.5) Angola ($30.5) and Nigeria ($6.2).

Because insurers are not liquid enough to invest in investment securities like bonds and fixed income to bolster earnings, the reward they give to owners are abysmally poor, while most of them do not even have the capital or cash flow to pay dividend.

For instance, 13 insurers paid a combined N12.35 billion to shareholders in 2018, this compares with the N78.50 billion Zenith put on the plate of owners.

The average industry dividend per share of is N0.06, this compares to Zenith Bank’s N2.70.
The stock markets, the symbol of capitalism rewards that serve public interest, and, on the other hand, punishes those that fail to meet public interest.

Shares of insurers are moribundly stuck at less than N0.50, and the N20.50 billion of AXA Mansard Insurance is less than the N50.12 billion market value of Tier 2 lender,

Over a decade ago, banks were in the same position as insurers as they were too many of them who had weak capital, but the radical reforms of former central bank governor, Chwukuma Soludo, transformed the industry after he introduced the N25 billion minimum recapitalization.
By the end of the exercise, the entire system had been consolidated into 25 banks, and the licenses of 14 insolvent banks were revoked in January 2006.

Analysts fret NAICOM may not be as relentless as the central bank in executing a recapitalization exercise.

The regulator has announced a new Minimum Paid-up Share Capital Policy for insurance and reinsurance companies in Nigeria.

The revised paid-up capital requires life Insurance business operators to raise its capital from N2 billion to N8 billion; General business from N3 billion to N10 billion, while that of Composite business has been jerked up from N5 billion to N18 billion.

 

BALA AUGIE

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